Fonterra farmer $3.2b capital return tipped to cut debt and boost upgrades

Industry leaders think common sense will prevail following the recent cash injection for Fonterra farmers.

The dairy giant last month paid out $3.2 billion to its 8000 suppliers/shareholders, equating to an average of $400,000 per farm ($2 per share, tax-free).

This was part of the proceeds of Fonterra’s $4.2 billion sale of its global consumer and associated businesses, including the Mainland, Anchor and Kapiti brands, to French-owned dairy multinational Lactalis.

Nearly 90% of Fonterra farmers voted in support of the sale last year.

FarmWise consultant James Thomas said he was hearing that debt repayment and improvements to farm infrastructure were top priorities for recipients of the payout.

“They want to give their houses, and those of their staff, a little TLC,” he said.

“They also want to tackle some fencing.”

Thomas, a Fonterra supplier near Morrinsville, stressed that the payout was a one-time opportunity.

“It comes off the value of shares [held by Fonterra suppliers]. It’s a redistribution.”

Because the sale was agreed to by Fonterra farmers last year, he said there had been a good lead-in time to plan how the funds were going to be used.

“It is important they make the most of it.”

He said some will use part of the payout for discretionary activities such as holidays and new vehicles, private and on-farm.

Community benefit

A member of the Matamata-Piako District Council, Thomas said the payout would also have spin-offs for local communities, particularly tradies and contractors.

He noted that farmers faced “extra pressures” at present through the fuel issue created by the conflict in the Middle East.

This will see “volatility” in the cost of imported fertiliser and its associated spreading by contractors.

DairyNZ economics head Mark Storey said Fonterra’s capital return represented a significant one-off payment of funds for many supplying farmers.

“For some, this will strengthen balance sheets, reduce debt, or provide flexibility to reinvest in their farm businesses,” he said.

“Others may use it to build resilience or meet upcoming regulatory and environmental requirements.”

At a sector level, Storey said this additional liquidity was likely to flow through to rural communities, supporting local businesses and regional economies.

“More broadly, New Zealand dairy farmers are currently in a period of relatively strong financial performance, with milk prices supporting positive cash flow across much of the sector,” he said.

“However, the outlook is not without risk. Ongoing conflict in the Middle East and disruption to shipping are contributing to volatility in fuel and fertiliser markets.

“These are key farm inputs, and sustained increases will put pressure on margins.

“As a result, while current returns are strong, many farmers are likely to take a prudent, long-term approach, focusing on strengthening their financial position and building resilience in the face of ongoing global uncertainty.”

Rotorua-Taupo Federated Farmers’ president Braydon Schroder said while it may feel “like Christmas” to many Fonterra suppliers, the reality was that a capital asset had been diverted for cash.

“It is still significant, and the economy will feel it in different ways.”

Debt servicing

Schroder, a Rotorua-based farm consultant and farm overseer for several Fonterra farmers, said debt servicing will be the top priority.

Farm ownership succession planning would also come into the mix for some, he said.

Schroder had also been discussing with farmers planned purchases relating to “virtual fencing” (cow collars), solar panels, upgrades to infrastructure and new farm vehicles.

“Some are also looking at expanding their business by buying further farms and town rental properties.”

Schroder said the payout was tempered by rising costs, particularly for fuel.

“Every single line item on a farm budget is being affected.”

He said that, while exact costs have not come through yet, “farmers will feel the brunt of it all now and in the coming months”.

Bay of Plenty Federated Farmers’ president Brent Mountfort said Fonterra suppliers he had spoken to had different thoughts about how they were going to use the payout.

“They are looking at things like deferred maintenance, infrastructure, fencing and farm technology, and, of course, debt reduction.”

Mountford said Fonterra farmers were “cautiously optimistic, given the “Trump factor” (possible tariffs) and the Middle East conflict with the resulting rise in fuel costs.

“It [the Fonterra payout] has come at a good time.”

Waikato Federated Farmers’ dairy section chairman Matthew Zonderop said Fonterra farmers deserved the win.

“It will go down in the history books,” he said.

“It’s well deserved; there is no question.

“Generations of farmers have worked hard for this one; 4am starts for decades through wind, rain, flooding, droughts and disease outbreaks, and rock-bottom farmgate milk prices.

“Farming regions and their communities will feel, see and touch the benefits of this cash injection into the New Zealand economy and, given the current circumstances, we probably need it.”